Third-Quarter GDP: Quick Overview

How much of the third-quarter GDP growth of 3.5%, which will be revised several times, is due to the “Federal Stimulus” money?

First, consumer spending contributed 2.36% to GDP growth. (Economists said the massive stimulus injected by the U.S. government, such as the cash for clunkers program that lifted car sales, helped boost consumer spending.) That leaves 1.14%.

Second, U.S. business inventories added 0.94% to GDP, because inventories decreased $130.8 billion, compared to $160.2 billion in the second quarter. That is right, a negative is a positive. That leaves .2%.

Third, business spending reduced GDP by 0.24 percentage points. Business spending would have been an even greater drag on GDP if not for housing. (Residential fixed investment grew by 24% thanks to the $8,000 first time homeowners tax credit.) See, housing is a component part of business spending in the calculation for GDP by the expenditure approach.

Fourth, one can deduce that Federal Spending increased GDP by the remaining .2%.
There you have it. The preliminary 3.5% GDP growth was due almost entirely to the cash for clunkers program, which by the way simply brought demand forward to the third quarter, first-time homeowners tax credit, and government spending.

What bothers me the most about the GDP numbers was the decline in personal and disposable incomes for the third quarter. Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second. Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. That amounts to a major reduction in consumer purchasing power going forward.

Job Creation Miracle: Another Lie

GMAC Asks Treasury for More Money

The "Wall Street Journal" reports the Treasury Department is likely to inject another $5.6 billion of new capital into GMAC. These billions are on top of the $12.5 billion that GMAC has received since December 2008.

In addition, Treasury officials also are moving to shore up GMAC's ability to fund its daily operations, with the FDIC guaranteeing an additional $2.9 billion in GMAC's debt. The FDIC backed $4.5 billion in GMAC debt earlier this year.

So, GMAC, after its third bailout, will have received (directly and indirectly) $25.5 billion in our money.

By the way, GMAC posted a second-quarter loss of $3.9 billion amid rising loan delinquencies and the continued weakness in the U.S. auto market.

When will this madness stop? And, where in our Constitution does it provide for an infusion of financial capital to the private sector by the U.S. Treasury?

Health Insurance Companies: Rapacious Profiteers Making "Immoral" and "Obscene" Returns?

Private health insurance companies have been demonized recently for making "obscene" profits, allegedly because of mergers, lack of competition, and monopoly power.

Since I am a numbers guy, let's look at the "facts," not lies or distortions. Health Care ranks 86th by net profit margin (Profits/Revenues) at 3.3%. That is, measured by after-tax profit margin, there are 85 industries more profitable than Health Care Plans. That is the fact!

I guess if you say something long enough and no one challenges those lies, it does become believable.

Cash for Golf Carts Fiasco

Just when you think that you have heard it all, along comes the government with another program. If you thought that "Cash for Clunkers" was a boondoggle, wait until I tell you about the golf-cart fiasco.

Thanks to the federal tax credit to buy high-mileage cars that was part of President Obama's stimulus plan, our infamous "Cash for Clunkers," Uncle Sam is now paying Americans to buy that great necessity of modern life, the golf cart. Yes, you read it correctly.

The Wall Street Journal reports that our government provides tax credits from $4,200 to $5,500 for the purchase of an electric vehicle, and when it is combined with similar incentive plans in many states the tax credits can pay for nearly the entire cost of a golf cart. "The purchase of some models could be absolutely free," Roger Gaddis of Ada Electric Cars in Oklahoma said earlier this year. "Is that about the coolest thing you've ever heard?"

In South Carolina, according to the Wall Street Journal, sales of these carts have been soaring as dealerships alert customers to Uncle Sam's giveaway. "The Golf Cart Man" in the Villages of Lady Lake, Florida is running a banner online ad that declares: "GET A FREE GOLF CART. Or make $2,000 doing absolutely nothing!"

Golf Cart Man is referring to his offer in which you can buy the cart for $8,000, get a $5,300 tax credit off your 2009 income tax, lease it back for $100 a month for 27 months, at which point Golf Cart Man will buy back the cart for $2,000. "This means you own a free Golf Cart or made $2,000 cash doing absolutely nothing!!!"

The golf-cart fiasco has followed an IRS ruling that golf carts qualify for the electric-car credit as long as they are also road worthy. These qualifying golf carts are essentially the same as normal golf carts save for adding some safety features, such as side and rearview mirrors and three-point seat belts. They typically can go 15 to 25 miles per hour.

The IRS has also ruled that there's no limit to how many electric cars an individual can buy, so some enterprising individuals are stocking up on multiple carts while the federal credit lasts, in order to resell them at a profit later.

Isn't our country great. Where else can you live and receive tax credits and loopholes for everything from cash for clunkers, plug-in cars to fuel efficient appliances, home insulation, and vitamins? If this keeps up, it will soon make more sense to retire and play golf than work for living. Bless America!

Source: "Wall Street Journal" (October 17, 2009)

Shanghai Stock Exchange ($SSEC)

Shanghai Stock Exchange has been a leading indicator of our domestic markets over the past two years. Recently, it has diverged from our domestic markets. See the following Point & Figure chart. Also, notice that the double-top formed within one price box of the top of the page. Why is that significant? That is my "contrarious indicator" that indicates a potential top if it occurs on the top of the page, or indicates a potential bottom if it occurs on the bottom of the page. Could this be a harbinger that the bear market rally is coming to an end?

Bullish Signal Reversed to Bearish Signal?

Is the DIA developing a "Bullish Signal Reversed to Bearish Signal" on a Point & Figure Chart? Critical support at $96, which would be a three-point reversal or $3. A price below $96 support ($95) would indicate that the "Bear Market" rally from March 2009 is over.

Note: To enlarge the chart, double-click inside of it.

S&P 500 Weekly Update

Our SPY position closed Friday at $107.26, which is up 2.9% from our average cost of $104.29. So far, so good.

Note: To enlarge the chart, double-click inside of it.

Since the market bottomed in March, the Dow has gained more than 50%, the S&P 500 up 58%, and NASDAQ up 68%. Wow, which is definitely an understatement. Ok, what has all those insiders (officers and directors) been doing? These are the individuals that should have a better notion of the present circumstances and likely prospects of the companies they run. Well, in the third quarter according to Insider Score, which keeps tab on buying and selling by officers and directors, total purchases by these individuals were $410 million. However, sales by officers and directors were nearly $7.4 billion. Or, to put it another way, for every $1 spent by insiders to acquire stock, they sold more than $18 worth. What do they do that we do not know?

Indispensable Man

I have been very quiet with my posts here and on Twitter this week. I am just sitting back and watching the "Bulls and Bears" go after each other with the Bulls having the upper hand for now. As General Charles DeGaulle once remarked: "The graveyards are full of indispensable men." I don't consider myself indispensable, because I don't like graveyards.

S&P 500 Weekly Update for October 2, 2009

The exponential moving average strategy continues in the bullish column. Saying that, I am cautiously optimistic that the bullish trend will continue. The average cost of the SPY's holdings is $104.24. Given today's close of $102.49, the portfolio is down 1.67%.

The following chart depicts the weekly 15 and 40 EMAs of the S&P 500
Note: Double-click inside of chart to enlarge it.

The next chart depicts the daily price along with the 50 and 200 EMAs for the SPY for the past year. What the daily chart is indicating is that the current weakness may carry the SPY down to its 50-day EMA ($101.64), which we are there now. If that price support level is penetrated, the next support level is the 200-day EMA at $96.50.

Note: To enlarge the chart, double-click inside of it.

Why am I illustrating the daily chart for SPY? Let me explain it this way. The weekly EMA strategy provides me with the long-term trend for the market. Currently, the long-term trend is bullish. Therefore, investment dollars and any additions are allocated to the bullish positions. I use SPY's daily EMAs, stochastics, and CCI to determine when to make such purchases. Since these indicators are currently negative, I will hold off making any additional purchases until these indicators turn positive.

Cruel September for Autos

Now that the "Cash for Clunkers" is a forgone conclusion. What have we learned? First, as I stated in previous posts, the "Cash for Clunkers" program simply brought demand forward for the purchase of new cars. Second, it amounts to a "one-hit-wonder." It definitely helped the third-quarter GDP numbers at the expense of the forth quarter and the first half of 2010.

Let's look at the evidence for September 2009 from September 2008: GM's sales fell 45%, Chrysler's sales fell 42%, Honda's sales fell 20%, and Toyota's sales fell 13%. The only auto maker whose sales fell in the single digits was Ford, whose sales fell 5%.

Double-debt recession, anyone?

Gold: Are You a Buyer or Seller?

Gold (GLD) closed today at $98.36. Way too many investors like gold at these levels to suit my investor taste. I am inclined to wait and see if the 50-day EMA at $94 will hold.
Note: To enlarge the chart, double-click inside of it.

Silver: Are You a Buyer or Seller at These Price Levels

Given the following silver (SLV) chart, what would you do? Buy or Sell? SLV closed at $16.54.

Let's see 93% of silver investors are bullish on it, according to Trade-Futures.com. I really don't know anyone who is not bullish on this metal, or for that matter on Gold, which is why I am a contrarian on both metals at these price levels.
Note: To enlarge the chart, double-click inside of it.

Investment Account: 100% in SPY

SPY closed today, Monday, at $106.45. I am now 100% invested in my investment account with an average cost of $104.24. As long as the 15-week EMA is greater than the 40-week EMA, I will remain invested. See yesterday's post for the weekly EMAs on the S&P 500.

S&P 500 Weekly Update for September 18, 2009

S&P 500 closed at 1068.30 for the week end September 18, 2009. The bullish (long-term) trend remains in place (See following chart.) The fourth 25% will be allocated to the SPY position on today's market close.

Does GM Have a Deal for You

All you have to do is purchase a new GM car and be "dissatisfied" with it, which should not be too hard to do, between 31 and 59 days after the purchase. You can not trade in a vehicle, and you will have to pay the registration fees. However, when you return the car, GM will refund the sales tax on the vehicle.

Also, keep-in-mind that you can't wreck it (You can have no more than $200 damage on it.), and you can't put more than 4,000 miles on it. You must also provide proof of insurance on the vehicle.

The American taxpayer has out done itself again. This is one sweet deal. Everyone should take advantage of it. After all, driving a free new car for two months is a real "steal", right?

I will be seeing you over at your local GM dealer.

Thanks to Karl Denninger over at the Market Ticker for this insight car tip.

Bernanke: Recession Has Likely Ended

Federal Reserve Chairman Ben Bernanke made his most emphatic declaration yet that the recession has ended! But Mr. Bernanke reiterated that tight credit conditions and a soft labor market will prove to be a challenge. That's right, Bennie Boy. It all about jobs, and they are not expanding. If jobs are not expanding, where is personal income going to come from to sustain retail sales? If it wasn't for "cash for clunkers and first time home buyers tax credit," retail sales would dropping like a brick! All what has happen is that we have brought demand forward for cars and homes. What Ben, are you going to do for an encore?

And what is this about tight credit, Bennie Boy? Don't you look at your own charts of member bank reserves that provide the banking system with the ability to make loans? Just look at the following chart. Reserves on a year-over-year basis are growing at over 1,800%!!! It is not tight credit. It is that the consumer can not take on any more debt. As a matter of fact, the consumer is "Deleveraging" itself from its debt burden.
Note: To enlarge, double-click inside of it.

Ben Bernake is either going to go down in history as the smartest Fed Chairperson or the biggest Dunce of all time. I think you do which one I believe he will be.

Third 25% Allocated to SPY

SPY closed yesterday, Monday, at $105.28. I am now 75% invested in my investment account with an average cost of $103.56. Once again, I will wait until Friday's close, September 18, to determine how I will implement the final 25%.

S&P 500 Weekly Update for September 11, 2009

The third 25% will be deployed tomorrow on the market's close. I will update the purchase price after the close tomorrow.
Note: To enlarge the chart, double-click inside of it.

Second 25% Allocation in SPY

SPY closed Tuesday at $102.94. I am now 50% invested in my investment account with an average cost of $102.70. Once again, I will wait until Friday's close, September 11, to determine how I will implement the third 25%.

Plutocracy: Rule of America?

Over the weekend, I read an interesting post (The True Middle Class) by blogger Tim Knight over at the "Slope of Hope." In his post, he looked at classes within American from the perspective of "in-the-know." The entirety of his post is as follows:

"There are some who call the United States a classless society. I certainly do not. But my view of "class" this morning only partly has to do with assets owned by a given party. It also has to do with how "in-the-know" someone is.

Cornupecuniae - This is the ruling class. The top 1% of the U.S. owns 34% of the wealth. Since the mid-1950s, the "skewed-ness" of wealth distribution has becoming increasingly distorted. But the important thing here is the concentration of knowledge and power, because that upper echelons have, over the past few decades, turned the United States into a virtual plutocracy. Consider the ethics and well-being of Goldman Sachs, and you pretty much get the picture. We'll call this Group #1.

Ignoramus Felicitia - Here's where just about everyone else is. This is where people who really don't understand the world around them reside. They don't really read that much. They like their sports, their action movies, their sit-coms. They need distractions, lest they risk a chance of being exposed to something unsettling. As long as they can get their $1.99 hot dog/Coke-with-refills at Costco and have a roof over their heads, they're not going to cause any trouble. I'd say this is 95% of the country. Let's call this Group #2.

Illuminata Miserque - And here we have those who may or may not have money, but they have knowledge, and they find that knowledge distressing. They learn; they read; they converse; they dig deeper; but there's not much they can do about what they find. This, as you can imagine, is the realm of Slope. Every day there are superb articles shared here, and as a group we continue to learn more and understand better; however, the principal result of which is agitation. We'll dub this one Group #3."

S&P 500 Weekly Update for September 4, 2009

The bullish trend continues as the 15-Week EMA exceeds the 40-Week EMA. See the following chart. I will implement the second 25% purchase of SPY on Tuesday's close. After the purchase, I will have committed 50% to this investment strategy. I will update the price on Tuesday evening.

Note: To enlarge the chart, double-click inside of it.

SPY Transaction

SPY closed at $102.46 today. I will use this closing price for tracking purposes. I will wait until Friday's close, September 4, to determine how I will implement the second 25%.

Harbinger

Two of my posts, "FDIC-Insolvent" and "Stock Market Exuberance" were harbingers of articles in Monday's (August 31) Wall Street Journal. The WSJ's article, entitled "Bank Deals Put U.S. (FDIC) on Hooks for Billions," is what I discussed in the FDIC-Insolvent post of August 27, 2009. The other article in tomorrow's WSJ entitled, "Can Rally Run Without Revenues?" was my theme in my post, Stock Market Exuberance (Friday, July 24, 2009).

S&P 500 Weekly Update for August 28, 2009

The Exponential Moving Average strategy has spoken. The market trend has now reversed from "Bearish" to "Bullish." That is, the 15-Week EMA exceeded the 40-Week EMA as of the close of Friday, August 28. Until the 15-Week EMA declines below the 40-Week EMA, my focus will be on implementing a bullish investment strategy.

Even though I consider the market's rise suspect, I must follow the EMA investment strategy. I will start the implementation strategy on Monday, August 31, by making incremental investments of 25% to the market each Monday over the next four weeks. By the end of the forth week, I will be 100% invested in the market, unless a sell signal is rendered within that time frame. Ny ETF vehicle of choice is SPY (S&P 500). I am not using any of the double or triple bullish index ETFs. I am staying very conservative for the time being. Please go back and read my post entitled, "Equity Index Traded Funds (ETFs)," of Saturday, July 15, 2009 for the symbol listings of the market index funds. For those of you that are either in a 401k or 403b retirement plans, your might want to consider one of your plan's index funds.

Note: To enlarge, double-click inside.

Deflation: Enemy Number One

The major economic problem that we face right now is deflation. That is, deleveraging by the consumer has become the norm, too much excess capacity by businesses, rising unemployment, and falling personal incomes are all the ingredients for deflation. Yes, I know the other camp states that inflation and the possibility of hyperinflation is the real villain. Also, the Fed has been doing its best to re-inflate the economy. Member Bank Reserves have grown at over 100% since last year. Keep-in-mind, the Fed does not increase the money supply. It provides the reserves to foster credit expansion to the banking system, which in turn increases the money supply by making loans to individuals and businesses. The problem is that there must be willingness on the part of individuals to borrow money and for banks to lend money. In a deflationary environment, individuals don’t borrow, because they are deleveraging themselves from previous debt.

The following chart illustrates the parabolic growth of the "Adjusted Monetary Base, which member bank reserves are the main component. Did anyone say unsustainable? But, oh how the Fed has been trying to reinflate this economy.
Note: To enlarge, double-click inside.

The second chart illustrates the year-over-year growth rate of the "Adjusted Monetary Base. This chart tells the same story as the previous chart but in percentage terms.
Note: To enlarge, double-click inside.

The final chart illustrates the growth rate of total loans and investments at commercial banks.
Note: To enlarge, double-click inside.

Notice anything about this chart that differs from the previous chart? The growth rate for total loans and investments is declining (due to the deleverage factor by consumers and businesses), while the growth rate for the Adjusted Monetary Base is increasing at a parabolic rate. That is why the deflation factor is looming greater than the inflation factor.

Best Six-month Rally in Stocks Since 1933

The market continues to defy gravity. Saying that, the weekly-EMA strategy will render a buy signal after the close of the market today. Even though I consider the market's rise suspect, the market has spoken. Since the sell signal in January 2008 until yesterday, the S&P 500 has declined 26.97%. Therefore, the EMA strategy has definitely been successful and kept our investment dollars out of harm's way. I will sent forth my investment strategy going forth after the close of the market today.

FDIC: Insolvent!

The Wall Street Journal reports today that, "The Federal Deposit Insurance Corp.'s fund that protects more than $4,500,000,000,000 in U.S. bank deposits fell to just $10.4 billion at the end of June 2009, as the banking industry continues to struggle with souring loans and regulators brace for pain in trying to clean up the mess."

It further states, "The level of the FDIC's fund, the lowest since the savings and loan crisis, almost guarantees that the government will have to hit the banking industry with another special fee to recapitalize its reserves. The agency said it had 416 banks on its "problem" list at the end of the second quarter, up from 305 at the end of March."

Folks, that was back in June. On August 14, we had Colonial Bank, sixth-largest bank failure in U.S. history, was taken over by FDIC and then sold to BB&T Corporation with some extremely favorable terms. (Favorable terms simply means the FDIC took over all the toxic assets from Colonial Bank.)

Now, let me see if I understand this correctly. Last year, during the financial debacle surrounding our financial institutions (commercial and investment banks), most of these entities had Equity Multipliers (Leverage Factor) in excess of 30:1. That simply means that if a financial institution has to write-off just 3% of its loan portfolio, it is insolvent. Guess what? That is exactly what happen last year. Right now, the FDIC has an Equity Multiplier of 433:1. You guessed it, and it is not pretty! We are talking about just a .23% decline in its equity will make FDIC insolvent. Since this calculation was based on its June 2009 data, I would surmise, especially with the failure of Colonial Bank, that FDIC is insolvent and needs a tremendous infusion of equity capital from the Fed, Treasury, and Banks. What does that mean for you? Well, you will be paying more in bank fees that is for sure; and that pittance of interest income that you receive on your CD will be even smaller.

Medicare Advantage (MA): The New Whipping Boy

What is Medicare Advantage (MA)? MA was enacted in 2003 to allow seniors to use Medicare funds to buy private insurance plans that fit their health needs and their financial budgets. MA has some built-in incentives to encourage insurers to offer lower costs and better benefits. Also, it's a program that puts patients in charge of their health care, not the government, which is why seniors like it and probably why this administration wants to cut it drastically. How drastically? If President Obama gets his way, he will cut the program by close to 20%. (White House fact sheet entitled, "Paying for Health Care Reform," states the administration would cut $622 billion from Medicare and Medicaid, with a big chunk coming from Medicare Advantage, to pay for health care reform.)

Already, an approximately 10 million seniors have enrolled in Medicare Advantage. President Obama is proposing to cut the MA program by nearly 20%, which would reduce the amount of money each senior would have to buy the MA insurance. This, in effect, would force most of the seniors currently on MA into Medicare (Parts A and B), because they could not afford the higher cost of MA. Didn't President Obama promised in New Hampshire that, "if you like your health-care plan, you can keep your health-care plan." Yes, he did say that! You will still be able to keep that MA plan that your like, but it will cost you substantially more. I guess he just forgot to mention that simple fact.

For people who choose to enroll in a MA health plan, Medicare pays the private health plan a set amount, every month. MA members typically also pay a monthly premium in addition to the Medicare Part B premium to cover items not covered by traditional Medicare (Parts A & B), such as prescription drugs, dental care, vision care, and health club memberships. In exchange for these extra benefits, individuals may be limited on the providers they can receive services from without paying extra. Typically, the plans have a network of providers that you can use. Going outside that network may require permission or extra fees.

From my perspective, the main benefit of Medicare Advantage is that individuals are taking personal responsibility for their health care by buying private health insurance that meets their specific health needs. However, for some reason, personal responsibility is an anathema in Washington, D.C.

$4,500 Cash for Clunkers: Taxable

Yes, that $4,500 you received for that clunker is taxable income. This is where it gets interesting in that the "cash for clunkers" is not a trade-in. It is a $4,500 check from the government. Therefore, when you go to register that vehicle, your sales tax is calculated on the full vehicle price (effectively paying sales tax on the $4,500). Plus, if your state has an income tax, you will probably wind up paying tax again, because the state will count the $4,500 as income for state income tax purposes.

Where is all the transparency and full disclosure that was going to happen when we had a changing of the guard in Washington, DC? Since this is a "family" oriented blog, I will not say what I really want to say. But, I think you get my drift!

And, you thought there was such a thing as free cash! Just like that 1099 you are going to receive for selling your house short. (See yesterday's post.)

The "Real Estate" Short Sale

Most investors are familiar with the concept of selling a stock short. That is, when an investor believes a stock price is going lower. Let's say the stock in question is currently selling for $50 per share. The investor can instruct his or her broker to borrow the shares so they can be sold. The borrowed shares are then sold for $50, and the investor's account is credited for that dollar amount. If the investor is correct and the stock moves lower, say to $40, the investor instructs the broker to purchase these shares at $40 to replace the shares that were borrowed. The net results of this short sale is a profit of $10 per share.

A real estate short sale is nothing like the stock short sale. Let's use this example. Homeowner A has a home mortgage with Bank ABC for $400,000. Due to the real estate debacle, the home is only worth $200,000. To say the least, our homeowner is deeply underwater. Also, our homeowner can not afford this house and must sell it or have Bank ABC foreclose on the home. The homeowner does not want the bank to foreclose on the home, because that would have dire consequences to the homeowner's credit score. Therefore, enter potential Buyer XYZ who makes a $200,000 offer on the home. Homeowner A goes to Bank ABC, presents the offer and requests that the bank forgive the remainder of the outstanding loan amount ($200,000). The homeowner's rationale to the bank is that the amount is what the bank would be able to receive if it foreclosed and sold it themselves. The bank agrees and accepts the "short sale." Homeowner A is happy with the transaction, because the bank has forgiven the remaining balance of the loan. In addition, the homeowner's credit score does not suffer. Everyone is happy, especially Homeowner A. However, Homeowner A is going to be in for a shock when the 1099's come out. Why? Homeowner A will receive a 1099 for $200,000, which is a shock of all shocks! How come? In effect, the bank gave our homeowner $200,000 to pay off the balance of the loan. That is the reason for the 1099, which I would surmise not many homeowners realize.

Confidence Tends to Breed Confidence?

Recent headlines in the "Wall Street Journal:" Housing Lifts Recovery Hopes; Central Bankers Breathing Easier; Stocks Hit New 2009 Highs. Remember that markets will do whatever it takes, to prove the majority opinion wrong. Way too many market pundits are in agreement that good times are here again. Enough said. Be very careful.

Does Anyone Have a Magnifying Glass?

It doesn't get any closer than this! However, since this is a weekly investment strategy, we have to wail until next Friday. Stay tuned.
Note: To enlarge the chart, double-click inside of it.

Improving Home Sales: Spin by the National Association of Realtors

The National Association of Realtors (NAR) reports that the housing market has come out of its tailspin, lifted by falling home prices, low mortgage rates, and an $8,000 federal tax credit offered to some first-time home buyers. Now, let's look at reality or simply the facts.

First, the $8,000 tax credit expires at the end of November. What this has done has brought housing demand forward, especially at the very low end of the real estate market. Something like the $4,500 "Cash for Clunkers" program that ends this coming Monday. Once the special incentives end, what do we do for an encore? Where is the demand going to come from?

Second, two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage. One in eight households with mortgages was in foreclosure or late (90 days or more) on their mortgage payments in the second quarter of 2009, which is a new high.

Third, home sales are roughly where they were last year at this time. Last year at this time, the NAR had called the bottom was in after sales of existing homes hit a five-month high.

Fourth, prime loans extended to borrowers with good credit are deteriorating at a faster clip as falling home prices and mounting job losses weigh on more households. These prime loans accounted for 58% of foreclosure starts, up from 44% last year.

Where is the real improvement? Yes, the $8,000 tax credit and $4,500 "Cash or Clunkers" program will push the real growth for GDP to the positive during this quarter, but such growth based on governmental incentives is not sustainable!

It’s about Jobs, Stupid!

The employment picture remains lousy to put it mildly. Where are the job openings? Corporations are still cutting jobs or sending them overseas. How many of the millions of jobs that were lost will ever return? So far this year, the U.S. lost 3.7 million private sector jobs. Even during the last economic expansion, after the dot-com bust, private job creation was conspicuous by its absence (negative 1,068,000 so far during this decade) as compared with the previous three decades where job creation averaged 17,000,000. See the following table, compliment of the Contrary Investor.

Note: To enlarge the table, double-click inside of it.

You can see that from the 1970’s through the 1990’s, the U.S. private sector created a lot of jobs. The numbers for the current decade through July 2009 is a negative 1 million plus. Keep-in-mind that this has been the first decade in the last four where the U.S. private sector has not created on job!

In Barron’s “Up and Down Wall Street” for the week of August 17, 2009, “Fred Hickey points out that information-technology jobs have scarcely proved immune to this recession (the unemployment rate in Silicon Valley is something like 11.8%), extending a decade-long trend. In that stretch, around 500,000 high-tech jobs joined the five million manufacturing slots that have gone overseas, lured in no small part by cheap labor.” By way of illustration, more than 70% of IBM’s workforce is now offshore.

Folks, these jobs are not coming back, which is not good for sustainable growth in GDP going into 2010 and beyond. Yes, we will probably see real GDP growth for the third quarter for statistical reasons, as discussed in my post entitled “Stock Market Exuberance,” dated Friday, July 24, 2009. In addition, without job growth, commercial and residential real estate is dead in the water. A recent report by Deutsche Bank, entitled "Drowning in Debt," estimates that within two years, home loans that are underwater, which are now 26% of the roughly 51.6 million residential mortgages, will rise to an astonishing 48%! In other words, one out of every two homes in America will be worth less than what is owed on the home. This is definitely not going to be a confidence booster to the American consumer.

I firmly believe that the job numbers, or lack thereof, is the key to our GDP recovery ahead. And for now, as far as the labor markets are concerned, there is absolutely no private sector job recovery. Thus, no sustainable economic growth lies ahead without job growth.

Reluctant Shoppers Hold Back Economic Recovery

Wall Street Journal reports, "American consumers are continuing to hunker down, casting a cloud over the durability of the U.S. recovery and underscoring the importance of overseas demand in restoring the world economy to health. Retailers across the spectrum provided foreboding reports. Discounter Target Corp. reported that sales at stores open at least a year were down 6.2% from a year earlier in the quarter ended Aug. 1, while luxury purveyor Saks Inc. reported a 15.5% drop in same-store sales over the past quarter as shoppers stuck to buying basics. Building-supply chain Home Depot Inc. saw total sales drop 9.1% in the quarter ending Aug. 2, and it reaffirmed expectations of a 9% sales drop this year."

It's all about the jobs, stupid! It's not that consumers are reluctant to spend. The reason is that without jobs or prospects for jobs, consumers simply have no income; and without income, consumption is not a viable option.

I will have a post, hopefully, tomorrow about the job situation going forward in the United States. It is not for the faint of heart. But, then again, truth is preferable to fiction IMHO. And that is exactly what you have been getting from the main street media outlets is nothing but fiction.

Quick Update on S&P 500 and TZA

The bears were in control today. The S&P 500 was down 24.36 points or -2.43%. (See the following chart.) The explanation for today's sell-off was that the Wall Street Journal reported that some economist are calling into question the overall perceived strength of the economic recovery. (I, for one, believe that GDP will show positive growth for the third quarter, more for statistical reasons as discussed in previous posts. Then, the economy will experience a "double-dip, negative growth" during the first half of 2010.)
Note: To enlarge the chart, double-click inside of it.
The second chart is that of TZA (300% inverse ETF on small cap stocks), which I mentioned on Twitter today. It closed at $16.89, and in after-market trading, it closed at $17. I will take a close look at it tomorrow morning and update on Twitter.
Note: To enlarge the chart, double-click inside of it.

S&P 500 Weekly Update for August 14, 2009

Note: To enlarge chart, double-click inside of it.

American Express: Despicable

I just received a form letter from American Express telling yours truly that they were increasing my interest rate. Its rationale, "Like all companies large and small, our pricing has to be responsive to the business and economic environment. As a result, we have found it necessary to increase rates and fees."

Let's analyze what American Express, and other credit card companies are doing. They get money for just about zero percent from the Federal Reserve System, because they are a bank holding company. Then, they want to lend it to me at 15% plus, depending on the prime rate, when my FICO score is 800. In other words, American Express wants individuals like myself that are not a credit risk to subsidize all the bad investments that they have made along with all the credit defaults that are occurring. Wonderful! American Express has been bailed out by taxpayers; now they want its credit-worthy account holders to bail them out. This is just another perfect example of rewarding failure and penalizing success.

For those of you that know me, you know that I will truly have a conversation with American Express.

Trillion Dollar Perspective

S&P 500 Update: for August 13, 2009 Alignment of Stochastics, PPO, and CCI

Recording Quality is not what I want it to be. I just don't know why it is not recording in HD, which it should. Thanks for your patients.

Quote for Today

"The problem with socialism is that eventually you run out
of other people's money." (Margaret Thatcher)

Banks Make $38 billion a Year from Overdraft Fees

Please read this post my Karl Denninger over at the Market Ticket.

According to Karl, "70% of the overdrafts happen at an ATM, not by writing a check. The bank knows before they approve the ATM transaction that the money isn't there in the account. It gets better: Banks will intentionally "sort" transactions from a given day to produce the maximum overdraft fee. They sort withdrawals to debit them largest-amount-first, because the fee is assessed per item. An example: You have $1,000 in your account. You write checks for $20, $50, $100, $1,000 and all are presented on the same business day. How many checks will hit you with an overdraft fee? THREE - every time. The bank will re-order the transactions so that the $1,000 check is processed first, guaranteeing that the $20, $50 and $100 checks overdraw, thereby generating three overdraft charges. If they processed the transactions "largest item LAST" you'd generate one overdraft fee - on the $1,000 check."

"But wait, it get better. It gets better. You have that $1,000 in your account. It is after 3:00 PM, the cut-off for a business day. You go to the mall and use your debit card four times to buy a $5 Latte, $15 lunch, a $40 pair of pants and $25 for a couple of movie tickets. The next morning a $1,000 check hits your account. The bank processes the $1,000 check first, even though in terms of actual presentation time the debit card withdrawals were approved first, and whacks you for four overdraft fees instead of the one legitimate fee on the $1,000 check. That Latte just cost you as much as $45!"

"This sort of predation is responsible for nearly $40 billion dollars a year in pure "profit" for the banks, it is directed specifically at those who have the least in resource to cover it, and it relies on lack of clear disclosure and intentionally-predatory "sorting rules" to get past what would otherwise result in a howl of protest by consumers and lawmakers alike."

This is what I want you to do. Forward this post to your banker and ask for an explanation on how they calculate and process those items in determining overdraft fees. Better yet, take a copy to your bank and talk with one of the many Vice Presidents or go directly to the President. Then, send a copy of this post along with your bank's explanation (if they give you one) to your Congressional Representative and Senators.

Allegiant Air (ALGT): Textbook Example of Using P&F Charts as a Contrarious Indicator

Note: To enlarge the chart, double-click inside of it.

Let me know if you have any such P&F examples that demonstrate this contrarious indicator. Keep-in-mind it is the extremes at the top or bottom of the page that is relevant. The P&P Charts that I am using are from StockCharts.

Using P&F Charts as a Contrarian Indicator

The first chart depicts the S&P 500 on a Point and Figure Chart. Notice that when the column of O's reaches the bottom of page, which indicates a very oversold condition, the price has a tendency to reverse. Likewise, when a column of X's reaches the top of the page, which indicates a very overbought condition, the price has a tendency to reverse. The second chart depicts DXD (Double-inverse short on the DJIA).
Note: To enlarge, double-click inside.
Note: To enlarge, double-click inside.

S&P 500 Update for the Week Ending August 7, 2009

If we get a buy signal next Friday, August 14, 2009, the signal would become effective Monday, August 17, 2009. The strategy that I will implement is to average back into the market. Over the next four Mondays, if a buy signal is generated, I will allocate 25% of my investment portfolio to the equity side of the market. For a refresher on the various types of Exchange Traded Index Funds (ETFs), refer to my post of Saturday, July 25, 2009.
Note: To enlarge the chart, double-click inside of it.

SPX Update

If prices stay firm, we may have a "buy signal" on the weekly exponential moving average strategy. However, do not jump the gun! I will have an update tonight with a purchase strategy that I will be using if we do get the buy signal.

U.S. Deficit Climbs to $1.3 Trillion for the Current Ten Months

The U.S. budget deficit reached 1.3 trillion dollars for the current fiscal year in July 2009 (first ten months with two months to go). The deficit for the first 10 months of fiscal year 2009 is close to 880 billion dollars greater than the deficit recorded for the like period last year (July 2008), said the Congressional Budget Office (CBO).

U.S. Job Losses Slow As Rate Drops to 9.4%

Bureau of Labor reports that job losses declined just 247,000 in July, while the unemployment rate surprisingly fell to 9.4% from 9.5%. Why the improvement? I contend that the answer lies with the "Baby Boomers" leaving the civilian labor force to go on Social Security. Look at the following chart provided by BLS. Notice the decline in the category "Not in the Labor Force" from May to July. So, on the surface the job situation does indeed look better. However, I believe we are going to see more and more "Baby Boomers" apply for Social Security as soon as they are eligible and not wait until they reach 66 or 67. What does that say about the immediate financial viability of Social Security and Medicare?
Note: To enlarge the chart, double-click inside of it.

Therefore, drop in unemployment rate is caused by drop in the civilian labor force, which I contend was caused by "Baby Boomers" leaving the labor force for Social Security. Let's look at the math with the following example: 19 people are unemployed out of 200 in the labor force = 9.5% unemployment rate. Then, 1 of those unemployed individuals leaves the labor force. Now, 18 people are unemployed out of 199 in the labor force = 9.0% unemployment rate. Folks, it is all about the math!

Wall Street Firms Could Collect Nearly $1 Billion from AIG Breakup

Wall Street banks and lawyers could collect nearly $1 billion in fees from the Federal Reserve Bank of New York and AIG to help manage and break apart the insurer, according to the Wall Street Journal. This sounds all to familiar. The government gives Wall Street billions to survive and pay bonuses, and then they receive billions more to bury their dead. What a sweet deal!

Toyota Corolla Overtakes Ford Focus as Top Seller

Sorry Ford, but at least you held the first-place status for one day! Where are GM and Chrysler?

Four of Top ‘Clunkers’ Model Purchases Are Foreign

Bloomberg reports, "Four of the top five models sold so far under the U.S. 'cash for clunkers' program are made by foreign automakers, according to Transportation Department data." Ford's Focus was the top seller (good for Ford), followed by Toyota’s Corolla, Honda’s Civic and Toyota’s Prius and Camry. What is missing from the list? Of course, there is "NOT" one of the Government Motors (GM) models in the top five. Surprise, surprise, surprise!!!

GMAC in Talks With Fed on New Capital Infusion

GMAC, which said that its second-quarter loss widened to $3.9 billion (Review my previous post on this subject.) and acknowledged it's in discussions with the Federal Reserve System on the $5.6 billion in new financial capital it needs. This is a joke, isn't it? Sad to say, but it's the truth.

Americans, when are we going to rise up and say enough is enough? I am beginning to believe that we, as taxpayers, are just sheep waiting to be slaughtered. I, for one, will not go down without a fight.

I know that the individuals that read this blog are well-informed and do care for this country. We may have different political views and agree to disagree, but we do care deeply about this country. We have to get involved and tell our Congressional Representative and Senators to stop this insanity that will for sure bankrupt our country.

Close, But No Cigar

Remember that the 15-Week EMA must close above the 40-Week EMA on Friday's close, not tomorrow or Thursday.
Note: To enlarge the chart, double-click inside of it.

Personal Income for June

The Bureau of Economic Analysis (BEA) reports that Personal income decreased $159.8 billion, or 1.3 percent, and disposable personal income (DPI) decreased $143.8 billion, or 1.3 percent, in June. Personal consumption expenditures (PCE) increased $41.4 billion, or 0.4 percent. Now, let me get this straight. Income is down, but consumption is up. Oh, the consumer had to take on more debt. Read on.

Karl Denninger from the "Market Ticker" had this to say about the income numbers. "What's worse in the income and spending report is that "saving" (actually debt paydowns) has decreased; this is particularly troubling given the continuing over-leveraged state of the consumer. The last thing we need in our economy is yet more debt defaults driving even more economic contraction, but it appears that's exactly what we're going to get."

"Oh, and don't look at tax receipts either: they're down huge, with individual income tax receipts down some 22%! The last time we saw numbers like this was The Depression; you can claim that personal income is down "only" 2% if you'd like, but the last time I checked you only paid tax on income actually received, and while the tax system is progressive there is no way you can square a 2% "reported" income decline with a 22% decline in income tax receipts. Someone's lying and I'm quite confident that people aren't paying taxes on money they didn't earn!"

He Who Has the Gold, Makes the Rules

"Let me issue and control a nation's money, and I care not who writes the laws." Mayer Amschel Rothschild (1744-1812)

Tax Dollars Wasted: GMAC Looses Billions (So, What Else is New?)

First, an excerpt from my posting of Tuesday, December 30, 2008 (Please go back and read the complete post): "GMAC reduced the credit score necessary to get a loan from 700 (very good) to 621 (not very good.) Do you believe this? I am loathed at how they are wasting my money as a taxpayer. Everyone that reads this blog should send a copy of this posting to his/her Representative and Senators demanding accountability. By the way, the median (average) FICO score in the United States is 723."

Second, there are consequences for such stupidity (to coin a word from President Obama) from GMAC. "GMAC, who received $13.5 billion in government bailout funds, reported a $3.9 billion second-quarter loss tied to rising loan defaults and said it may sell part of its insurance operations. The loss, GMAC’s seventh in the past eight quarters, rose from $2.48 billion a year earlier." What do you expect when you reduce one's credit score from 700 to 621! Then again, it is not GMAC's money, it is the American taxpayer.

Please forward this posting and the posting from December 30, 2008 to your Representative and Senators and remind them how you intend to cast your next Congressional and Senatorial votes.

Summary of Latest Federal Individual Income Tax Data

The Internal Revenue Service has released new data (July 30, 2009) on individual income taxes, reporting on calendar year 2007, a year in which the economy remained healthy and continued to grow.

In 2007, the top 1 percent of tax returns paid 40.4 percent of all federal individual income taxes,and earned 22.8 percent of adjusted gross income (AGI). Both of those figures, share of income and share of taxes paid, are significantly higher than they were in 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes.

That means the top 1 percent of tax returns paid more in federal individual income taxes than the bottom 95 percent of tax returns. Ok, what adjusted gross income (AGI) qualifies you for the top 1% status? Any dollar amount greater than $410,096. Not what I would consider to be super, super rich; but a whole lot less than what a lot of individuals would have guessed.

The top 5% of taxpayers (AGI over $160,041) paid 60.63% of all individual federal income taxes. The top 10% of taxpayers (AGI over $113,018) paid 71.22% of all individual federal income taxes. The top-earning 25 percent of taxpayers (AGI over $66,532) earned 68.7 percent of the nation's income, but they paid 86.6% of all federal individual income taxes. The bottom 50% (AGI less than $32,879) of all taxpayers paid 2.89% of all federal income taxes.

Therefore, I would surmise from the "2007 Individual Income Tax Data" that anyone whose AGI is greater than $66,000 will see a significant increase in their federal tax burden to cover the ever expanding cost of the federal government. (Did anyone say a national sales tax coming soon, like the VAT in Europe?) And, keep-in-mind that this summary was about your federal tax burden, not your state tax burden that will also be increasing in the near future!

Note: To enlarge table, double-click inside of it.
Source: The Tax Foundation

Weekly Update on S&P 500: 15- and 40-Week EMAs

I have expanded the time horizon for this week's update. The weekly S&P 500 chart goes back to 1972 (some 37 years). What I want you to observe is how accurate the exponential moving average strategy has been in identifying long-term bull and bear markets.

Most market pundits have already preordained that a new bull market is upon us! The cover of Newsweek just proclaimed that the "recession" is over. For me, I will let the exponential moving address speak for itself. Until the 15-week EMA exceeds the 40-week EMA on a Friday's close, everything else is market noise.
Note: To enlarge the chart, double-click inside of it.

Your Tax Dollars at Work: This should make you fighting mad!

NEW YORK (AP) -- Citigroup Inc., one of the biggest recipients of government bailout money, gave employees $5.33 billion in bonuses for 2008, New York's attorney general said Thursday in a report detailing the payouts by nine big banks.

The report from Attorney General Andrew Cuomo's office focused on 2008 bonuses paid to the initial nine banks that received loans under the government's Troubled Asset Relief Program last fall. Cuomo has joined other government officials in criticizing the banks for paying out big bonuses while accepting taxpayer money.

Citigroup, which is now one-third owned by the government as a result of the bailout, gave 738 of its employees bonuses of at least $1 million, even after it lost $18.7 billion during the year, Cuomo's office said. The bank's top four recipients received a combined $43.7 million.

Bank of America, which also received $45 billion in TARP money, paid $3.3 billion in bonuses, with 172 employees receiving at least $1 million and the top four recipients receiving a combined $64 million. Merrill Lynch, which Charlotte, N.C.-based Bank of America acquired during the credit crisis, paid out $3.6 billion, including a combined $121 million to four top employees.

Bank of America earned $2.56 billion in 2008, while Merrill lost $30.48 billion. Cuomo's office said Merrill Lynch doled out 696 bonuses of at least $1 million for 2008.

Goldman gave 953 workers bonuses of at least $1 million, with its four most highly compensated employees receiving a combined total of nearly $46 million. JPMorgan gave 1,626 employees at least $1 million, and its top four recipients received a combined $74.8 million. The two banks each gave more than 200 employees bonuses in excess of $3 million.

Wall Street Analysts Keep Telling Big Earnings Lie

"At a time when the financial industry’s credibility is at an all-time low, you would think Wall Street’s finest would break their necks providing transparency.

Not so. Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know.

Instead, their earnings estimates ignore often huge expenditures that can’t help but affect a company’s health.

In analystspeak, Intel Corp. wasn’t hit with a $1.45 billion fine from the European Union in the second quarter for anti-competitive practices.

After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.

As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn’t cost its shareholders $293 million.

Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options."

For the full article, go to Bloomberg.

Hot Off the Press!

Newsweek declares the recession is over. (LOL) Boy, have I been waiting for this news. We can all sleep better tonight knowing that good times are here again. Thank you, Newsweek.

Let's see. From the $787 billion stimulus plan, the government only had to spend 5% ($39 billion) of it to get us out of the recession. Will Congress now cancel the remaining $748 billion part of the stimulus package?

Government Approval Index

I wish someone, say the ProFunds Group, would come up with an exchange traded note (ETN) that measures an approval index for Congress. We have indexes to trade on just about everything else, why not Congress? Boy, would that be fun to trade.

Government Discovers That Paper Has Two Sides!

Governmental Agencies responded to a presidential savings challenge by trimming 0.006% off the $2 trillion deficit. Among the cuts: close unused email accounts and photocopy both sides of a page. Don't just love the overall "efficiency" of our government. Just think of the efficiencies and savings that we will reap when the government takes over health care.

GDP Time Friday

Note: To enlarge, double-click inside of chart.

The Politics of Oil Speculation: Pre-emptive Scapegoating Over Rising Oil Prices

The following excepts are from today's WSJ's "Opinion Page (editorial insights)." I want to draw your attention to the second paragraph that puts forth an hypothesis for the real reason behind the CFTC pronouncement yesterday.

"Last summer, as oil prices were peaking, the Commodity Futures Trading Commission "CFTC" launched an investigation into whether $100-plus oil was the result of market manipulation by those “speculators.” That interim report, issued in July 2008, concluded that price movements were largely driven by—wait for it— supply and demand. The report noted, among other findings, that so-called speculators were net short during some of the biggest run-ups in oil prices over the past several years. In other words, they were, if anything, putting downward pressure on prices during some big spikes. The CFTC also found that markets in which futures trading is outlawed altogether—such as onions (yes, onions)—price volatility tended to be even greater than in commodities like oil with deep and efficient futures markets."

"So the CFTC is now poised to issue a follow-up repudiating the commission’s earlier findings. This week’s hearings are being held without the benefit of the CFTC’s actual findings, which are due out in August—but no matter. The CFTC’s about-face is all about the politics, not the economics, of price discovery. And the real goal is not to blame the evil speculators for last year’s price spike or this year’s oil rally, but to lay the groundwork for explaining away the commodity-price bull run that we’re likely to see as a result of the Federal Reserve’s easy money and the Obama Administration’s spending and debt party."

Equity Index Exchange Traded Funds (ETFs)

As an investor, you have two to three choices as it pertains to the amount of leverage that you want to assume if and when the exponential moving average triggers a buy signal (See the following Bullish Investment Strategy). For example, in the following table, SPY (+1x) means that you are purchasing an ETF on the S&P 500 that replicates the move in the underlying security (one for one). In other words, if the S&P 500 increases by 5%, SPY would replicate the 5% move. If you want more leverage, say 300% or 3x, you would purchase the UPRO (+3x). Now, if the S&P 500 increases by 5%, the UPRO would increase by 15%, or 3x the increase in the S&P 500.

Bullish Investment Strategy: When the 15-week EMA exceeds the 40-EMA on the S&P 500 (weekly close), which would trigger a bullish signal, you have to decide on the amount of leverage (risk) that you want to assume. Let’s assume that you have $300 dollar portfolio. In addition, you do not want to assume risk greater than that associated with the S&P 500. Given that scenario, you have three strategies that you could implement: (1) purchase $300 worth of SPY, which would replicate the price movement of the S&P 500, one for one, (2) purchase $150 worth of SSO, which would replicate 2x the movement in the S&P 500 and invest the remaining $150 in a money market instrument, such as BIL that replicates the return on 1-3 month Treasury bills (Your overall risk would be approximately the same as in strategy 1, but you are earning interest on the $150 invested in a money market instrument.), (3) purchase $100 worth of UPRO, which would replicate 3x the movement in the S&P 500 and invest the remaining $200 in a money market instrument, such as BIL (Your overall investment risk would be the same as in strategy 1 as delineated under strategy 2.).
Note: To enlarge the table, double-click inside of it.

Comprehensive Exchange Traded Fund (ETF) Guide

As I prepare to post some of my favorite "bullish and bearish" ETFs, I thought it would be a good idea to provide some background information on exchange traded funds. A great source is at ETF Guide.

S&P 500 Update for the Week Ending July 14, 2009: Moment of Truth

The first chart provides the 15-week EMA and the 40-week EMA, which is still bearish (15-week EMA < 40-week EMA). The second chart utilizes two simple moving averages (10-week and 40-week), which has turned bullish. Which one has an unblemished record over the past decade? Answer: EMA. That is why I monitor the 15-week EMA and 40-week EMA for my investment signals. Keep-in-mind that since weekly data is involved, the signal is taken at the close of the week (Friday). Therefore, if we have a buy signal (15-week EMA > 40-week EMA) on a Friday, one would move into equities, preferably exchange traded funds (ETFs) on Monday. I will provide a list of my favorite ETFs on my next post. Have a great weekend!Note: To enlarge the chart, double-click inside of it.To enlarge the chart, double-click inside of it.

Stock Market Exuberance

Wow! The bulls are definitely back in town. I want to provide some of my reasons for the strong market performance here lately. I will start with the consumer and provide my reasons why the consumer will not lead us into the next economic recovery. Then, I will focus on corporate profits and some selective components of GDP.

Consumer spending is about 70% of GDP. Therefore, I contend that no consumer spending, no substantial growth to GDP. Further, consumer spending cannot increase materially as unemployment heads to 10%+ (The employment growth for the current decade will clearly be negative by the end of this year.), wages are stagnant, in spite of the minimum wage going to $7.25, capacity utilization rests at the lowest level ever recorded (67%), and average hours worked hit a record low in June, as did the year over year change in aggregate weekly hours. In addition, since consumer credit hit a top of $2 trillion in January of 2009, only $60 billion has been reduced. No, the consumer deleveraging is not complete. And, credit card companies are aggressively cutting credit lines back significantly, in some cases to open balance amounts. These facts simply suggest that the consumer is not ready to aggressively lead this economy forward.

If these are indeed the sober facts, then why has the market acted so well? The answer is based on corporate cost cutting that has definitely enhanced the performance of corporate earnings during the current quarter. Let me explain it in the following way. The largest corporate expenditure is labor cost, and labor cuts have definitely boosted the corporate bottom lines. That is why Wall Street has responded in such a positive way. However, can the US economy recover and begin to grow based on labor cost cutting measures? What is good for corporate bottom lines is not good for employee wages, job growth, and, of course, consumer spending! Something has to give. What we have seen so far this quarter is that corporate earnings have come in above expectations (Market has loved it.), because of the cost cutting endeavors by corporate America. But, the revenues were below expectations. Corporate earnings increased solely on cost cutting measures, especially labor, not revenue growth. That is a real problem. Wall Street definitely is placing a lot of hope on revenue expanding during the second half of the year. I just don’t see it happening as long as the labor cuts continue, and the consumer continues to deleverage.

As just mentioned, I firmly believe the consumer will not be the catalyst for the next economic recovery phase, based on my aforementioned rationale. And, it is hard to see the catalyst being corporate America. I believe the true harbinger for “true” economic growth will only come from growth in capital expenditures and, of course, corporate labor numbers, which are currently dismal. Keep your eyes on those two measures. If those measures do not rebound quickly, I believe Wall Street is going to be in for a big awakening.

Another reason for the market gains is simply mathematics. In recent quarters, several critical components of GDP have declined at astounding negative annual rates (30% to 40%), such as housing, automobiles and business investment and inventories. Eventually, those huge negative numbers on a year over year basis will start to look a whole lot better. As an example, let’s say that housing on a year over year basis from June 2008 to June 2009 is down 40%. Next month (July), the housing numbers are still negative but on a year over year, they are down 10%. That change alone would have a positive impact to GDP growth. Notice that the move from -40% to 10% doesn’t constitute a boom, but merely slowing in the decline. Housing constitutes approximately 3% of GDP. In my example, that improvement, even still negative, would add about 1% to GDP.

Many analysts think housing may in fact bottom out in the third or fourth quarter of this year. Autos may already have passed their low point. Over the past year, inventories have been liquidated at an unprecedented rate. That, too, must come to an end. As inventory change turns from a large negative number into a less negative number. GDP will get another a big boost. Therefore, the numbers, year over year, are bound to look better.

Therefore, Wall Street recent gains have been based on better than expected corporate profits that are based solely on cost containment and reduction, not revenue growth, and year over year improvements in the statistics on housing, auto, and business inventory numbers. I, for one, do not believe that Wall Street has fully comprehended the possibility that these statistical improvements may turn out to be nothing more than a shooting star.

I will have the weekly exponential moving updates on the S&P 500 either later tonight or over the weekend. We are nearing a critical junction in relations to the 15- and 40-week EMA. One stock market model that I track had the market bottoming in April 2009, which, so far, the low was March, and topping in June 2011. To say the least, I really did anticipate that the S&P 500 would trade in the 800 to 850 levels before it would trade at 979. However, let’s keep in mind that the exponential moving average strategy moved us out of equities in January 2008 when the S&P 500 was at 1,401. At today’s close of 979 on the S&P 500, that is still down 30% from January 2008 level.

Cash for Clunkers

Cash for your clunker starts today! Here's how it works: If you own a 1984 or newer vehicle that has been insured and registered to you for the past year and gets a "combined" 18 miles to the gallon or less, you can qualify. The car must also be drivable.

If you trade it in for a car that gets an additional four more miles per gallon or more, your reward is a $3,500 voucher, which can be used toward purchasing a new car. If you switch to a vehicle that gets 10 miles-per-gallon or more in fuel efficiency, then the government gives you $4,500.

To see if your used car has a qualifying miles-per-gallon rating, the Department of Energy has set up a Web site with the official used car mileage ratings called Fuel Economy. By the way, the site also provide the "carbon footprint" for you vehicle(s). This knowledge will assist you in determining how much extra in taxes that you will eventual have to pay when the "Cap and Trade Bill" is finally passed.

For me, my carbon footprints for my 2007 Honda Civic, 2005 Honda Pilot, 1995 Mazda Millenia, and 1989 Isuzu Pickup are 6.3, 10.8, 9.2, and 11.4, respectively.

TWENTY-FOUR TRILLION DOLLARS ($24,000,000,000,000)

The government’s top watchdog, Neil Barofsky, over the $700 billion TARP financial rescue package said the Treasury Department has "repeatedly failed" to adopt his recommendations that would make the program more transparent and accountable to taxpayers.

He will tell lawmakers on Tuesday that taxpayers are being left in the dark about what banks are doing with bailout money, don't know the value of the government's investments, and will not know the full extent of how the money is invested. [Once again, these are the folks that want to run our health care system!]

Barofsky said that while the TARP program that Congress passed amounts to $700 billion, the total federal government support since 2007 for the economy and the financial sector could reach a far higher figure of $23.7 trillion. That is approximately $80,000 for every legal man, woman, and child in the U.S.

We have no one to blame except our selves. This is blatantly unconstitutional. We're talking about nearly double the nation's GDP in debt commitments and more than thirty-three times the amount authorized by Congress. What is going on? Where was the Congressional appropriation for that $24,000,000,000,000?

For the complete article, click-on the Hill.

Ham Update

The references to "2 pound frozen ham sliced" are to the sizes of the packaging. The contract in question purchased 760,000 pounds of ham for $1.191 million, at a cost of approximately $1.50 per pound. Now, I don't know about you, but I can purchase that same size ham for approximately $.75 per pound. Check it out the next time you are at your local grocery store. Oh, this is the same government that is telling us that through government efficiencies of running our health care system, they will save billions of dollars. Does anyone out there really believe the government's rhetoric?

Recovery.Gov

The $787 billion stimulus plan was sold on the underlying concepts of "job creation." So far, that concept is no where to be found. However, some of stimulus money went to fund, not create new jobs, the following items: $2.5 million for ham, water added, cooked, frozen, and sliced, $1.2 million for two pound frozen ham sliced, $350,000 for replace and upgrade a dumbwaiter, $1.6 million for cheese, $16 million for canned pork, and $1.4 million for door repairs. Good site to visit is Recovery.gov.

S&P 500 Update for the Week Ending July 17, 2009

S&P 500 closed the week at 940.38, which is right at the 40-week EMA. Since the 15-week EMA is still beneath the 40-week EMA, investors are still in a defensive position. However, saying that, notice how the 15-week EMA is rising; and the 40-week EMA has flattened out. Also, notice the potential "Head and Shoulder Bottom Formation," which does have bullish implications. In addition, the RSI has once again moved back above 50.

I am still in the bearish school, because the 15-week EMA < 40-week EMA. However, when and if the 15-week EMA > 40-week EMA, I will immediately become "BULLISH."
Note: To enlarge the chart, double-click inside of it.

Over the next week, I will be providing a number of "bullish" index ETFs for you to start tracking.

Joe Biden: We Have to Go Spend Money to Keep From Going Bankrupt

Vice President Joe Biden told people attending an AARP town hall meeting that unless the Democrat-supported health care plan becomes law the nation will go bankrupt and that the only way to avoid that fate is for the government to spend more money. And many thought Dick Chaney was a poor excuse for a Vice President, but Biden takes the prize for being completely economic illiterate.

July 2009: Deadliest for U.S. Forces in Afghanistan

Twenty-four (24) Americans have been killed in Afghanistan this month, according to statements by the U.S. The rate of deaths in July is approaching some of the highest levels of the Iraq war.

Question: Why aren't the main-stream media sources reporting these deaths as they did on a nightly basis during the Irag war? Answer: The Irag war was Bush's war. The Afghan war is Obama's war, and he can do no wrong.

Coming Soon to Your State

Note: To enlarge, double-click inside.

CIT Rescue Talks Collapse

The "Wall Street Journal reports CIT reported Wednesday "that there is no appreciable likelihood" it will receive fresh government support in the near future." "Talks with the government were complicated by conflicting signals over who was leading them. Some say Treasury officials were in charge, others say the Federal Reserve headed the talks, while still others say that the main focus was on decisions at the FDIC."

Therefore, because of the bureaucracy involved between and among the Federal Reserve, Treasury, and FDIC, there were no clear lines of authority about who should decide about granting a bailout to CIT. So, by default nothing was done! I would consider that to be a moral victory by default. You have to love it, but, then again, this is a perfect example of governmental bureaucracy at its best.

Now, let the market place decide the fate of CIT.

Why Lehman Brothers was Allowed to Fail: An Interesting Perspective

Here We Go Again: CIT

CIT, you had more than a year to get your house in order. You had more than two years of watching your stock plummet, from a high of $61.59 in the early 2007 to $1.35 yesterday. During this time, your only strategy was to to form a bank-holding company to get a government bailout. The reason that your strategy has not worked is because the FDIC was against it. Good for them! But, now the Federal Reserve and the Treasury are involved, which quite frankly probably means a bail-out for you. Bad for the U.S. taxpayer and shame on the Fed and Treasury!

We cannot, as a nation, keep doing these bailouts. Sooner or later, if we continue down this path of bailing out everyone, we will find ourselves in a total economic collapse. I, for one, am rapidly losing faith that we will survive as an economic power.

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